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Student Loan Debt: Part 3

Updated: Apr 1, 2023

While President Biden’s student loan forgiveness plan is tied up in court, the White House has extended the payment pause. Federal student loan bills were scheduled to resume in January, but with the forgiveness plan blocked in the courts, the Administration extended the pause until after June 2023. While the legal battle continues, it’s important to understand your situation and the options for borrowers today.


What’s the difference between Federal student loan deferment and forbearance?


Since student loan debt is generally difficult to get discharged (unless Biden’s forgiveness plan provides some relief), it’s important to make sure your loan stays in good standing during tough financial times. With inflation at a record high, it’s important to understand all your options for temporary payment relief. Income-based repayment plans with lower or no monthly payments aren’t exactly the best long-term option, so deferment or forbearance may be a short-term safety net in order to stay up on your monthly payments.


Deferment


Student loan deferment is a suspension of payments (like the White House payment pauses since 2020). Right now, all loans are eligible, but generally you can apply for subsidization and the government pays the interest. However, you will continue to accrue interest on unsubsidized loans even though you aren’t making payments during the deferment period. You can apply for deferment if you are in school, (such as graduate school), active duty or an approved full-time rehab program. Borrowers may also be eligible for determent if they are unemployed and looking for full-time work. Typically, borrowers have to apply for deferment and provide documentation of eligibility. It’s important to remember that interest still accrues during the deferment period, so continue paying interest in order to not add to the loan principal.



It’s important to remember that interest still accrues during the deferment period, so continue paying interest in order to not add to the loan principal.

Forbearance


Student loan forbearance suspends loan payments or reduces them temporarily. Forbearance basically allows borrowers to skip loan payments without becoming delinquent, an important distinction. Interest continues to accumulate in forbearance, unless you pay the interest while on forbearance. When it ends, any accrued interest is added to the overall principal loan balance and future interest is calculated now based on the new, higher loan amount. Lenders could approve forbearance for poor health, financial hardship, medical expense or change in employment. Forbearance is usually no more than 12 months at a time.


Deferment or forbearance should only be considered in dire situations as the interest continues to grow and may ultimately extend your repayment timeframe. If borrowers just stop making payments, it could lead to default status, which is worse than either option above.


Even with the current payment pause from the Federal government, it is important to continue paying interest and budget for principal repayment as well. Should the student loan debt forgiveness plan not go into effect, it’s important to maintain a financial health and understand your options.


This situation is constantly evolving, so more to come! If you have questions, please comment below.




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